Product Licensing: Everything you Need to Know
Product licensing is a streamlined way to turn an idea into a product that's ready for sale.7 min read
Updated June 24, 2020:
What Is Product Licensing?
Product licensing is a streamlined way to turn an idea into a product that's ready for sale. Here's how to license a product:
- Come up with a great idea.
- Protect your intellectual property through the United States Patent and Trademark Office (USPTO).
- License a company to manufacture and distribute your product.
- Collect royalties.
Product Licensing: What Is It?
Product licensing is one of the easiest ways for inventors to bring their ideas to life. Inventors simply rent, or license, their ideas to a company, which manufactures and distributes the product quickly and easily. This process tends to be faster, more affordable, and more lucrative than other options, such as starting a new company to sell an invention.
You can increase the chances of making product licensing part of your business plan if you cultivate a culture of creativity. Research growing markets and find avenues to develop products where there's established demand.
Why Is Product Licensing Important?
Product licensing offers an ideal balance of risk and reward. This process can enable inventors to earn 20 times their initial investment. It also enables large companies such as Proctor & Gamble to reduce their internal research and development costs while partnering with outside entrepreneurs.
Reasons to Consider Licensing a Product
- You don't have the resources or the business plan to start a new company or to dedicate time to research and development.
- You don't know how to get your product into a retail market, or your company isn't large enough to work with major retailers.
- You have many ideas for inventions but not enough time or savings to produce them.
Reasons to Consider Not Licensing a Product
- You want to start a business to have total control over your product manufacturing, distribution, and sales.
- You think you have a good chance of being selected for a crowdsourcing platform such as Edison Nation.
- You found a company like OXO or Ikea that wants to buy your intellectual property outright. If you can make a reasonable deal, it could be in your best interest to sell instead of license.
- Not producing a product that manufacturers want to license. Not every product is ideal for licensing. Fewer than 10 percent of inventors successfully license their products. A licensing deal can require extensive negotiating and effort. Also, you may have to invest some of your own money up front to complete your product and make it worthy of licensing. Try pitching your product to retailers to gauge interest before seeking out licensees.
- Not knowing enough about your market. To license a product, you'll have be persistent and tenacious. You'll have to know your market like the back of your hand, since you'll be working hard to sell it to licensees. You'll also have to understand market demand and know how much risk your product brings. Be prepared to pitch your product and licensing deal professionally, with a multimedia presentation and prototypes if possible.
- Not knowing enough about the licensee. Always do your research to learn as much as possible before pitching to a licensee. One that already has manufacturing and distribution in place for your category of product could be a good fit. If you know enough, you may be able to tell the company how it can make and distribute your product efficiently.
- Wanting to keep control over your invention. When you license an invention, you'll have little control over it. Do your research to make sure the manufacturer is reputable. Also ensure the distribution plan is strong before agreeing to a licensing deal.
- Not protecting your intellectual property. Many inventors seek out a patent before licensing a product, as this gives you the rights to your invention. Many licensees won't work with you if you don't have this level of protection. Take care not to file too early, though. First, find out if you need one. Then complete your idea as much as possible before filing, since you may have to refile if the final version changes the idea too much.
- Taking "no" for an answer. Product licensing requires extensive negotiation. Be ready to compromise. Remember that there is no standard agreement for licensing. If you want to work with a company, try to find an internal champion who will want to sell colleagues on your product and make the deal happen.
- Only approaching one licensee. Many inventors receive numerous negative responses before signing a deal. Pitch to several licensees to increase your chances of finding a worthwhile business partner, even if you have one ideal partner in mind.
- Not having a lawyer review your licensing contract. Like any business contract, licensing deals can be complicated. Have an attorney review or create a licensing agreement to make sure the terms, time frame, and royalties make good business sense. You should also have an attorney review any confidentiality agreements before signing.
Frequently Asked Questions
- How Much Is a Standard Royalty for a Licensed Product?
Earning 5 percent of gross wholesale sales is typical for inventors. This equals about half of what the licensee earns. But the manufacturer has to manage much more risk and do much more work than the inventor does. Some inventors also earn an advance license fee, or a lump sum paid up front. Others earn equity stake in the licensee's business.
- When Can You Expect to Start Earning Royalties?
The terms of the agreement specify when you'll begin to earn royalties. Most licensing agreements need product development, manufacturing, packaging, and shipping before generating sales. Therefore, more than a year can pass before you earn royalties. If retailers have waiting periods, you may have to wait for two years before receiving royalties.
- How Much Can You Really Make From Product Licensing?
A great selling product priced at $15 could generate $20,000 to $30,000 in royalties a year. However, about 95 percent of the 8,000 new kitchen implements introduced each year fail. Most generate royalties of just $1,000 a year.
- Can You License More Than One Product?
Yes, and many inventors have multiple licensed products on the market at any given time. Since the royalties can be low, licensing several products may be necessary for making your time and resource investment worthwhile.
- Can Product Licensing Agreements Fall Through?
Yes, they may be nullified if retailers don't have enough interest, or licensees choose not to go ahead with research and development. As the licensor, you may be able to obtain a nominal fee if the deal doesn't go through as planned.
- How Is Obtaining a License for a Product Different From Product Licensing?
Getting a license to use the logo of a well-known brand or sports team can make a product much more saleable. Encouraging a big-name brand to sign a licensing agreement can be hard, though. This is what Bob Diee and partner Glenn Luthy did to produce their baseball cap-shaped computer mouse. They attended trade shows and pitched their idea to Major League Baseball teams and universities after NFL and NBA teams passed on the offer. Eventually they signed a licensing agreement and got Champs Sports and Yankee Stadium to carry the product.
Jeff and Maureen Kendall took another approach to licensing brands for their kids apparel line, Little Ruler. They obtained licenses from bands and skateboard brands for their clothing line. But they only sell 20 percent in stores. They sell the rest on their own e-commerce site.
Connect with the International Licensing Industry Merchandisers' Association to learn more and find potential partners. You may need a patent, a distribution plan, a history of selling similar products, or a lucrative royalty offer. Most inventors also have a strong knowledge of their markets or substantial funding in place.
Most products in this category sell for premium prices, as they take royalty payments into account. The brand-name recognition usually justifies the higher price.
- Can Manufacturers Seek Products Available for Licensing?
Yes, most manufacturers start by preparing a company profile with current products made, sales volume, and desired markets. Then reach out to licensing consultants, licensing exhibitions, trade offices and agencies, universities, research and development companies, trade associations, and trade publications to solicit products for licensing. Assess any opportunities you find, and negotiate a licensing agremeent when you're ready to move forward with the process.
- What Are Promotional Materials?
These are licensed products given away for free.
Steps to License a Product
- Invent an original product. Take the time to sketch it out, create prototypes, and document your invention. You can also develop an improvement for an existing product.
- Research your market. Before you patent your invention or search for licensees, make sure there is demand for your product. Develop a business plan to make sure you make a smart business decision.
- Do a patent search. Use the USPTO's online patent database to make sure your idea isn't already patented.
- Consider filing a provisional patent application. If you need to protect your intellectual property but you haven't perfected your product yet, a provisional patent application could be a smart compromise.
- File a patent application. Use the USPTO's EFS-Web service to file a patent application online. Work with the patent examiner until your patent is issued.
- Search for licensees. Seek out licensees in your market and prepare to pitch. You may need to network, place a paid ad, or reach out to several licensees before you find one that's interested. Take the time to build relationships with potential licensees and learn their processes, especially if you intend to license more products in the future.
- Sign a licensing agreement. Once you have found the right business partner, sign a licensing agreement. Don't hesitate to have your lawyer review it and suggest edits to ensure your rights are protected. Most licensing agreements include the following:
- Subject Matter: This may be a patent, trademark, copyright, design, or trade secret.
- Granting of Rights: This defines what you're transferring to the licensee.
- Licensor's Obligation: This details any assistance or training the licensor will give.
- Licensee's Obligation: This details financial requirements, guarantees, and confidentiality.
- License Fee: This refers to the sum that the licensee receives upon signing.
- Royalty: This specifies the percentage of the wholesale sales that the licensor will receive. Many agreements include a minimum royalty. Most royalties are paid quarterly.
- Term: This defines the length of the agreement.
- Designated Area: This describes the limits of the manufacturing and marketing area.
- Termination: This describes how either party can end the agreement.
- Guarantees: This includes any warranties or liabilities that the licensee provides.
- Collect royalties. As your product sells, collect royalties for the duration of the agreement.
If you need help with product licensing, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience. They have worked with or on behalf of companies like Google, Menlo Ventures, and Airbnb.